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Module 5: Investment Appraisal

Learning Objectives: On completion of this section you will be able to carry out investment decision analysis by making extensive use of cash flows for four years of operations of the firm, the theory and practice of time value of money, net present value (NPV), internal rate of return (IRR), break-even point (B/E) and payback period.

On completion of this module you will able to carry out strategic investment decision analysis by implementing key policies of the firm aimed at securing the financial objectives of:

(i) The financial return of an investment made by the shareholders of the firm. The methodology of analysis estimates the profitability of an investment, based on the net cash flow over several years, making use of quantitative techniques: Net Present Value (NPV) and Internal rate of return (IRR).

(ii) Payback Period, namely, the time it takes to recover the initial investment by shareholders.

(iii) Break-even Point, the point at which the company stops losing money and starts generating profits.

What is Investment Decision Analysis?

Is the evaluation process to determine whether an investment in a project or a company is worthy to be carried out, namely, survives in the long term having good levels of liquidity and is profitable or the investment should not be undertaken as the capital may be lost, be of poor profitability yielding even losses or the benefits do not materialise.

In Module 1, Module 2 and Module 3 we have studied the fundamentals of accounting, the recording of financial transactions, the preparation of financial statements, ratio analysis, cash flow management, changes in equity.

In Module 4 the learning method was based on carrying out simulations or “What if” analysis implementing management actions as: (i) market share; (ii) increase in unit prices; (iii) decrease in purchase costs; (iv) increase in Supplier’s Credits, to achieve the targets of liquidity an profitability (Payback, ROIC and ROE).

Now we proceed, in Module 5, to study investment decision analysis techniques that are used to analyse the quality of investments by looking into the "future" streams of costs and benefits on the operating life of the company so to ascertain whether the investment is worthy to be carried

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